Buying Fairtrade — an acquired taste for investors

Fairtrade foods are popular with ethical consumers. For investors, a sustainability bond based on the same is not so straightforward. Nevertheless, the UK’s Co-operative Group has joined the small group of companies stretching the labelled bond market towards improving supply chains. Jon Hay reports

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Green and sustainable bonds have often been compared with Fairtrade products in a supermarket. Both allow consumers (or investors) to obtain essentially the same good — whether a banana or a bond — perhaps at a slightly higher price, but with a sense that they are doing it more ethically.

The two ideas were combined in May 2019, when the Co-operative Group launched the first sustainable bond whose proceeds were allocated to purchasing Fairtrade goods.

Fittingly, the 175 year old retailer, ubiquitous on UK high streets, had been the first supermarket to sell a Fairtrade product, in 1992.

The £300m bond was rare in four ways. Socially responsible investment bonds are sparse in the UK; in the retail sector; and among high yield issuers — the Co-op is rated BB. Hardly any SRI bonds are based on making supply chains more sustainable.

Ironically, some of what made the deal unusual also marginalised it in the eyes of major SRI bond investors. But the bond poses questions the market will have to explore.

Its first appearance was not happy. In November, after publishing its Sustainable Bond Framework, with a second opinion from Vigeo Eiris, the Co-op roadshowed for its first deal. It had a productive two days, but then prime minister Theresa May reached a withdrawal agreement with the EU. Four ministers resigned, and in already jittery markets, investor feedback on pricing leapt by 100bp. Scot Morton, Co-op’s treasurer, pulled the deal and associated bond buyback.

By May, the Co-op had released a good set of results, with sales over £10bn, and he was ready to try again.

SRIThis time, the deal worked well — at least as a high yield issue. The £250m five year note, offered at 5.25%-5.5%, swelled to £300m and was priced at 5.125%. Barclays (billing and delivering), ING (sustainability adviser) and Lloyds Bank were bookrunners.

The issue, however, attracted only a few “true green” investors and large funds who said part of their order was for an SRI fund. These orders were not enough to move pricing meaningfully. Still, a banker on the deal said Co-op had paid no new issue premium.

The company was pleased with it as an act of communication. “We do lots of things sustainably — we invest in schools, we do Fairtrade,” says Morton. “This helps to tell that story.”

In November, investors had asked only two questions about sustainability. But during premarketing in May, “some of the investors fed back that they understood the sustainable bond process much more than they had in November,” says Morton. “They had had time to digest the nuances. This time we got, not questions, but more comments from investors.”

Barry Clavin, who leads the Co-op’s ethical policies team, says: “We are very keen that our business is aligned with the Sustainable Development Goals. This was how we could demonstrate our commitment. It will take a huge global investment to achieve the SDGs, which needs to be trackable and measurable.”

Co-op’s BB rating was a stretch for some SRI investors. For others, the deal didn’t tick the green box.

For food or wine sold with the Fairtrade label, the producer in a developing country is guaranteed a minimum price, plus a premium to invest in community projects. The scheme, begun by UK charities in 1992, has spread to 19 rich countries. Environmental sustainability is also part of the certification requirements, but is not the main thrust.

Flying the opex flag

The deal tested limits in another way, too. Some SRI bond investors and bankers dislike proceeds being used for operating expenditure, as Co-op did, rather than capital expenditure.

“Someone needs to draw a boundary,” said a banker in June. Members of the Green and Social Bond Principles discussed this at this year’s AGM.

“It is a danger for the market,” said the banker, who takes a strict line. “Suppose in a few years’ time we have $100bn of outstanding corporate green bonds and they have only financed opex — that potentially means you would have $100bn of bonds with no underlying assets. The overall approach that it channels more investment toward the transition [to a low carbon economy] vanishes completely.”

For others, the distinction is artificial: corporate green activity requires opex and capex.

The Co-op was aware of this, but advisers pointed to Starbucks, which has issued sustainability bonds based on ethical coffee purchasing since 2016. Morton says no investors complained at the lack of capex.

If labelled bonds are to help the economy move to sustainability, that will probably have to include changes in supply chains, as that is where a huge part of many companies’ environmental and social impacts lie. Most such bonds are likely to include a high component of opex.

The market may not have reached a settled view, but deals like the Co-op’s contribute to the debate.

“If we had just gone down the old route of issuing a vanilla bond, there would have been no transparency about the use of proceeds,” says Clavin. “If you don’t say where the money’s going they don’t ask, but if you do they start asking questions.”